House Prices In Sharpest Fall Since 2009

House prices have recorded their biggest year-on-year decline in almost three years, according to new figures.

Average prices have plunged by 2.6% since last year and fell by 0.7% in July alone, according to the Nationwide house price index.

It is the fourth decline in five months and makes the average home in July worth £164,389 - down from £165,738 in June.

June's prices were also 1.5% down on the same period last year. Overall, prices now stand at some 13% below their 2007 peak.

The study said the Bank of England's new funding for lending scheme could give a boost to the housing market, but with the eurozone crisis continuing, Nationwide expects to see only a "modest recovery" in the coming months.

The latest research comes after the British Bankers' Association – currently embroiled in the Libor rate-fixing scandal – found that mortgage approvals slumped to their lowest number in at least 15 years in June.

Nationwide chief economist Robert Gardner said: "The weaker price trend observed in recent quarters is unsurprising, given the disappointing performance of the wider economy."

"Data released last week revealed that the UK recession intensified in the three month to July, with the economy contracting by 0.7% quarter on quarter.

"This disappointing outturn can be only partly explained by unusually wet weather and the impact of an extra bank holiday during the quarter," Mr Gardner said.

"Indeed, the UK economy has contracted by 1.4% over the past nine months, and is now 4.5 percentage points smaller than it was in Q1 2008."

However, the building society admitted that although the statistics appear grim, the UK economy has shown resilience compared to other countries like the US and Spain.

It is thought the strength of the UK labour market, driving demand for homes, has probably helped prop up the housing sector.

"However, this pattern of negative economic growth and steady employment growth cannot be sustained indefinitely," Mr Gardner said.

"Much will therefore depend on the ability of the UK economy to gain momentum in the quarters ahead if labour market conditions, and therefore demand for homes, are to be adequately supported."